Findlay v. Florida East Coast Ry. Co.

• Decision Date: 29 April 1933
• Docket Number: No. 758.,758.
• Citation: 3 F. Supp. 393
• Court: U.S. District Court — Southern District of Florida
• Parties: FINDLAY v. FLORIDA EAST COAST RY. CO. et al.

3 F. Supp. 393

FINDLAY v. FLORIDA EAST COAST RY. CO. et al.

No. 758.

District Court, S. D. Florida, Jacksonville Division.

April 29, 1933.

COPYRIGHT MATERIAL OMITTED

Marks, Marks, Holt, Gray & Yates, of Jacksonville, Fla., for plaintiff.

White & Case, of New York City, and Knight, Adair, Cooper & Osborne, of Jacksonville, Fla., for defendants Bankers' Trust Co. and Bethune W. Jones.

Root, Clark & Buckner, of New York City, and L'Engle & Shands, of Jacksonville, Fla., for defendants Kenan & Haines.

STRUM, District Judge.

This is a suit in equity, the purpose of which is to procure a construction by this court of item No. 9 of the will of Mary Lilly (Flagler) Bingham, deceased, and to compel the application of the residuary trust fund created by said will, hereinafter mentioned, in financial aid of Florida East Coast Railway Company for the benefit of its creditors.

The bill of complaint, in effect, alleges that, upon the death in 1913 of Henry M. Flagler, the founder of the railway and hotel companies hereinafter mentioned, his wife, Mary Lilly Flagler, as principal beneficiary under her husband's will, became the beneficial owner of substantially all the stocks and properties of Florida East Coast Railway Company, Florida East Coast Hotel Company, and other subsidiary corporations, together with an additional estate of great value consisting largely of stocks and bonds of still other corporations.

Thereafter Mary Lilly Flagler married Robert W. Bingham. She died testate in 1917. Her will was executed September 23, 1916, in West Virginia. It was republished December 8, 1916, in Kentucky. When Mrs. Bingham died she was a citizen of Kentucky. See Com. v. Bingham's Adm'r, 187 Ky. 749, 220 S. W. 727. Administration proceedings were had in Kentucky (see Louisville Trust Co. v. Bingham, 178 Ky. 573, 199 S. W. 58), though the will was also probated in Palm Beach county, Fla., and executors appointed there in addition to the Kentucky administrator.

After devising all her real estate to a niece (exclusive, however, of any real estate, the title to which was vested in the trustees under the will of her late husband, Henry M. Flagler), and making certain other specific bequests, all the residue of her property was vested under the will in two trustees who were directed to pay certain other specific bequests.

Item No. 9 of the will, here involved, is in part as follows: "All the rest and residue of my estate, including all lapsed bequests or devises, shall be held for the term of twenty-one years from the date of this my will by my said Trustees, in trust for the maintenance and administration and development of the Florida East Coast Railway and Florida East Coast Hotel properties (which are hereinafter called `principal properties'), and the properties held by subsidiary Companies. * * *"

This item of the will further provides that the trustees shall have power to sell, mortgage, or otherwise obligate the residuary estate, except the stocks and bonds of said "principal properties," and to reinvest the proceeds and income, and concludes with this language: "The primary purpose of this trust being the keeping together of the enterprise into which my beloved husband, Henry M. Flagler, put so much of his energy, ambition and life."

The present trustees are William R. Kenan, Jr., and Lawrence C. Haines, the former a brother of Mrs. Bingham. Both trustees are citizens and residents of the state of New York. Mr. Kenan is also a remainderman under the will, with a contingent interest in the residuary estate, another item of the will providing that, upon the termination of the twenty-one year trust, the residuary estate then remaining shall be divided amongst Mr. Kenan and his two sisters, who are also sisters of the testator. The stocks, and perhaps some of the bonds, of the "principal properties" are a part of the residuary estate held by the trustees, but the residuary estate contains much other property, principally corporate stocks and bonds.

Mr. Kenan, at the time of Mrs. Bingham's death, was and still is president of Florida East Coast Railway Company and Florida East Coast Hotel Company. For many years prior to September 1, 1924, the railway company's properties were subject to a trust deed securing a $12,000,000 bond issue. During the year 1924 the railway company, to fulfill the public demands upon it to supply adequate transportation facilities, embarked upon an extensive improvement and enlargement project, which was financed by a bond issue of $45,000,000, called "first and refunding bonds," secured by a further deed of trust upon all the properties of the railway company then owned or thereafter acquired. Much additional rolling stock and equipment was purchased, financed by equipment trust certificates aggregating $5,080,000, secured by reservation of title to the equipment purchased therewith. This was during a period when the territory served by the railway was experiencing an intensive and abnormal development activity, which produced unprecedentedly heavy public demands upon the railway company for transportation facilities, both freight and passenger.

Plaintiff, a citizen of Colorado, alleges that he is the holder of $70,000 of first and refunding bonds of the $45,000,000 issue secured by the trust deed aforesaid.

Due, it is alleged, to the stress of economic and other conditions in Florida between the years of 1927 and 1931, the existence of which conditions the court judicially notices, the railway company was unable to meet its interest obligations on the $45,000,000 bond issue which matured September 1, 1931. On August 31, 1931, upon the petition of Standard Oil Company, a common creditor, all the properties of the railway company were taken into the custody of this court to prevent dismemberment at the hands of warring creditors. William R. Kenan, Jr., and Scott M. Loftin were appointed receivers of said property, to operate and conserve the railway property upon the orders of this court, which receivership is still in existence. During the five years immediately preceding the appointment of these receivers, the railway operated at a continuing loss aggregating during said period approximately $8,000,000, and was still operating at a loss.

A bondholders' committee was organized to represent the holders of the defaulted bonds, but the plaintiff Douglas C. Findlay elected not to deposit his bonds with the committee, nor to join in its activities.

The $45,000,000 first and refunding bonds are the obligations of the railway company, a corporation, and they, as well as the trust deed securing them, are executed by the corporate officers of the railway company, pursuant to due authority from the board of directors. The trustees of the residuary estate of Mary Lilly (Flagler) Bingham, as such, did not join in the execution of the bonds, nor in the execution of the trust deed securing the same. Nor did the trustees mortgage or pledge the residuary estate in any manner to secure the payment of the bond issue secured by the trust deed executed by the railway company.

Plaintiff complains that the trustees have refused to aid the railway company out of the funds of the residuary trust estate above mentioned, and that the corporate officers of the railway, one of whom is a trustee of the residuary estate, have mortgaged the properties of the railway company beyond its power to presently repay, and so as to seriously impair the value of its stock, and to jeopardize the existence of the enterprise.

Plaintiff also alleges that the trust deed securing the $45,000,000 bond issue created a specific lien upon all the equitable assets of the railway company, amongst which are said trust estate, and that the bondholders are entitled to impress the trust estate with the lien of said mortgage, and sequester the assets thereof to meet the bond maturities, interest upon which is in default.

Bankers' Trust Company, a corporation, and Bethune W. Jones, who are made parties defendant to this suit, are trustees under the trust deed securing the $45,000,000 issue of bonds. On May 12, 1932, these trustees filed in this court their suit in equity for the foreclosure of said trust deed, alleging default in interest on September 1, 1931, and March 1, 1932, which suit was consolidated in this court with the original suit of Standard Oil Company, sub nom. Bankers' Trust Company and Bethune W. Jones, as Trustees, v. Florida East Coast Railway Company (consolidated cause No. 757-Eq.). William R. Kenan, Jr., and Scott M. Loftin, already appointed receivers in the original suit, were appointed receivers in the consolidated cause.

By the bill of complaint in this cause, plaintiff, Douglas C. Findlay, questions the activities of the trustees, Bankers' Trust Company and Bethune W. Jones; charges them with a lack of diligence in protecting the rights of the bondholders, and with a lack of judgment and discretion in seeking the foreclosure of the trust deed at this time; further alleging that he cannot with safety intervene in the consolidated cause because he is in disagreement with the propriety thereof and with the relief sought therein; and, therefore, brings this suit, which he asserts is an ancillary suit in aid of the bill of complaint in the consolidated cause, in behalf of himself and other bondholders who have not deposited their bonds with the bondholders' committee. Plaintiff prays that this court construe item No. 9 of Mrs. Bingham's will as creating an equitable asset of the railway company covered by the lien of the trust deed above mentioned; that a separate receiver be appointed in this cause to take into possession the rights of the railway company in and to the residuary trust fund, and to apply the proceeds of that fund in payment of the defaulted interest on plaintiff's bonds and other bonds of said issue.

Prior to the institution of this suit, however, and on May 16, 1932, Scott M. Loftin, as...